1 00:00:03,200 --> 00:00:06,600 Speaker 1: Global business news twenty four hours a day. It's Bloomberg 2 00:00:06,640 --> 00:00:09,720 Speaker 1: dot Com the radio plus mobile lap and on your radio. 3 00:00:10,000 --> 00:00:14,280 Speaker 1: This is a Bloomberg Business flash from Bloomberg World Headquarters. 4 00:00:14,480 --> 00:00:17,920 Speaker 1: Signed Charlie Palette. Stocks to continue to trade little change. 5 00:00:18,000 --> 00:00:19,880 Speaker 1: We have got thirteen minutes to go ahead of the 6 00:00:19,920 --> 00:00:23,120 Speaker 1: clothes here, stocks of pared earlier losses and mid light volumes. 7 00:00:23,520 --> 00:00:26,520 Speaker 1: SMP five hundred index down two points now twenty one 8 00:00:26,680 --> 00:00:29,840 Speaker 1: six one. It is down by one tenth of one percent. 9 00:00:29,960 --> 00:00:34,040 Speaker 1: Nastak also declining one tenth of one percent down. Industrials 10 00:00:34,200 --> 00:00:38,160 Speaker 1: up eleven now advancing seven tenths of one percent. DAL 11 00:00:38,240 --> 00:00:40,800 Speaker 1: could be on track for a record close tenure down 12 00:00:40,840 --> 00:00:43,600 Speaker 1: sixteen thirty seconds the old one point five nine percent, 13 00:00:44,000 --> 00:00:46,720 Speaker 1: Gold lower by four eight ounce down four tenths of 14 00:00:46,760 --> 00:00:50,000 Speaker 1: one percent thirteen twenty seven on gold this Friday. Crude 15 00:00:50,000 --> 00:00:53,400 Speaker 1: oil up six tenths of one percent, forty five nine barrel. 16 00:00:53,640 --> 00:00:58,160 Speaker 1: I'm Charlie Pellottat's a Bloomberg business flash. You're listening to 17 00:00:58,280 --> 00:01:02,080 Speaker 1: taking stock with Kathleen Hayes in Pimpbox on Bloomberg Radio. 18 00:01:02,720 --> 00:01:06,640 Speaker 1: Oil and banks. You think they're connected, well, they certainly aren't. 19 00:01:06,640 --> 00:01:10,120 Speaker 1: Wells Fargo. Wells Fargo's energy loan losses rose in the 20 00:01:10,240 --> 00:01:13,000 Speaker 1: second quarter, as the oil bus claims several of the 21 00:01:13,040 --> 00:01:17,679 Speaker 1: bank's clients, including Lynn Energy and bright Burn Energy Partners, 22 00:01:18,200 --> 00:01:20,839 Speaker 1: they find out more. I want to bring in Mike Mattioli. 23 00:01:20,959 --> 00:01:24,440 Speaker 1: He is a portfolio manager for Manu Life Asset Management. 24 00:01:24,440 --> 00:01:26,959 Speaker 1: He joins us from Boston. Mike, thanks very much for 25 00:01:27,000 --> 00:01:29,960 Speaker 1: being with us. Thanks for having me. Let's go through 26 00:01:30,000 --> 00:01:32,680 Speaker 1: some of the big banks that reported results today. Let's 27 00:01:32,720 --> 00:01:35,480 Speaker 1: begin with Wells Fargo. Is it really all about energy? 28 00:01:36,760 --> 00:01:39,039 Speaker 1: You know the things on the way the stocks trading today, 29 00:01:39,040 --> 00:01:41,360 Speaker 1: it seems like it's all about energy. Um. When you 30 00:01:41,400 --> 00:01:43,399 Speaker 1: just look at earnings and what they posted, it was 31 00:01:43,959 --> 00:01:46,080 Speaker 1: they came up a bit like because of those energy 32 00:01:46,120 --> 00:01:48,960 Speaker 1: losses um, and it's remaining a headwind the profit growth. 33 00:01:49,320 --> 00:01:52,400 Speaker 1: But it's not all energy. If you listen to the 34 00:01:52,480 --> 00:01:55,480 Speaker 1: management conference called guidance on net interest income was a 35 00:01:55,520 --> 00:01:58,559 Speaker 1: bit subdued, saying that they could still grow net interest 36 00:01:58,640 --> 00:02:02,080 Speaker 1: income even in a flatting NIM environment because they're going 37 00:02:02,120 --> 00:02:04,600 Speaker 1: to be growing core loans. But due to what's going 38 00:02:04,600 --> 00:02:06,840 Speaker 1: on with interest rates, both on the shore and long 39 00:02:06,920 --> 00:02:09,200 Speaker 1: end of the curve, it's going to be pressured a 40 00:02:09,240 --> 00:02:11,240 Speaker 1: little bit, all right. Just to give you the numbers, 41 00:02:11,240 --> 00:02:14,400 Speaker 1: net income down to five point six billion dollars or 42 00:02:14,480 --> 00:02:17,799 Speaker 1: a dollar one to share. That's from five point seven 43 00:02:17,840 --> 00:02:21,520 Speaker 1: two billion or a dollar three to share a year earlier. 44 00:02:21,880 --> 00:02:25,000 Speaker 1: And that did match the average estimates of analysts surveyed 45 00:02:25,120 --> 00:02:28,200 Speaker 1: by a Bloomberg. I thought that more that Wells Fargo 46 00:02:28,560 --> 00:02:31,800 Speaker 1: was the mortgage banking king and revenue there the clients 47 00:02:31,800 --> 00:02:33,920 Speaker 1: se do you think we're going to get a wave 48 00:02:33,960 --> 00:02:38,399 Speaker 1: of refinancings? Would that help Wells Fargo? It would certainly help. 49 00:02:38,520 --> 00:02:40,440 Speaker 1: I was actually a bit surprised that we didn't see 50 00:02:40,480 --> 00:02:42,880 Speaker 1: that come through. What we may be looking for in 51 00:02:42,919 --> 00:02:45,800 Speaker 1: the third quarter is with rates so low that the 52 00:02:45,840 --> 00:02:47,920 Speaker 1: refi activity really does come up. So it would be 53 00:02:47,960 --> 00:02:51,280 Speaker 1: interesting to see how in the third quarter Wells Fargo 54 00:02:51,360 --> 00:02:54,639 Speaker 1: is going to capture that central refive volume. Alright, Well 55 00:02:54,680 --> 00:02:58,240 Speaker 1: total revenue rose about four percent. That also was in 56 00:02:58,320 --> 00:03:02,600 Speaker 1: line with analysts estimates. Hostale banking down about five and 57 00:03:02,639 --> 00:03:05,200 Speaker 1: a half per cent, And I wonder if you could 58 00:03:05,240 --> 00:03:08,440 Speaker 1: contrast that with what you know about JP Morgan's results, 59 00:03:08,480 --> 00:03:10,760 Speaker 1: which seemed to focus a lot on cost cuts and 60 00:03:10,880 --> 00:03:16,079 Speaker 1: trading revenue. Did JP Morgan's earnings yesterday, We're pretty good 61 00:03:16,240 --> 00:03:18,840 Speaker 1: when you look at their strong core loan growth up 62 00:03:18,880 --> 00:03:22,799 Speaker 1: almost sixteen percent year on year, their compounding tangible book value, 63 00:03:22,800 --> 00:03:26,080 Speaker 1: their increasing capital return. Uh, you got better capital market 64 00:03:26,160 --> 00:03:30,400 Speaker 1: activity across the wide and diverse franchises across all their 65 00:03:31,200 --> 00:03:33,760 Speaker 1: across the holding company. It was very good. I mean 66 00:03:34,000 --> 00:03:39,640 Speaker 1: comparing contrasting different banks earnings just day over day. It's 67 00:03:39,760 --> 00:03:41,680 Speaker 1: all the stocks are going to trade based on what 68 00:03:41,720 --> 00:03:44,400 Speaker 1: people's expectations are. When management comes out on a day 69 00:03:44,440 --> 00:03:47,400 Speaker 1: like today, uh and sort of guides down a little 70 00:03:47,400 --> 00:03:49,600 Speaker 1: bit on the net interest margin, it's probably going to 71 00:03:49,680 --> 00:03:51,880 Speaker 1: hurt the shares. And that's what we're seeing here, Mike. 72 00:03:51,920 --> 00:03:55,400 Speaker 1: I'm wondering if that is also necessary for people to 73 00:03:55,560 --> 00:03:58,320 Speaker 1: understand when they invest in and let's say in exchange 74 00:03:58,360 --> 00:04:01,960 Speaker 1: traded fund that focus is on banks because not all 75 00:04:02,040 --> 00:04:04,960 Speaker 1: banks are the same. You really just can't compare them 76 00:04:05,040 --> 00:04:10,000 Speaker 1: as if they operate in exactly the same businesses. That's 77 00:04:10,000 --> 00:04:12,920 Speaker 1: exactly right. So whether we're comparing JP Morgan, Wells, Fargo, 78 00:04:13,000 --> 00:04:15,680 Speaker 1: City Group, Bank America, while at the end of the 79 00:04:15,800 --> 00:04:17,960 Speaker 1: day all four of a number of banks, they have 80 00:04:18,240 --> 00:04:21,200 Speaker 1: many diverse in different businesses amongst each other. Think about 81 00:04:21,240 --> 00:04:23,640 Speaker 1: City Group that has a larger presence outside of the 82 00:04:23,720 --> 00:04:26,800 Speaker 1: United States. You think about Banks America, which has a 83 00:04:26,880 --> 00:04:29,839 Speaker 1: very large financial advisory business, and then even a company 84 00:04:29,880 --> 00:04:33,840 Speaker 1: like JP Morgan that has asset management, investment banking, consumer 85 00:04:33,880 --> 00:04:36,600 Speaker 1: and commercial loans, a trust bank in there. So they 86 00:04:36,600 --> 00:04:39,720 Speaker 1: are very diverse. They're competing against each other. Um. So 87 00:04:39,880 --> 00:04:41,839 Speaker 1: you know, a bank isn't just a bank. It could 88 00:04:41,839 --> 00:04:44,680 Speaker 1: be a number of different things sometimes as well. All right, 89 00:04:44,720 --> 00:04:47,279 Speaker 1: so let's talk about the City Group for just a moment. 90 00:04:47,720 --> 00:04:51,560 Speaker 1: Just following up on Wells Fargo shares are down about 91 00:04:51,600 --> 00:04:53,960 Speaker 1: two and three quarters of a percent, the shares of 92 00:04:54,000 --> 00:04:56,599 Speaker 1: City Group down about three tents of a percent. City 93 00:04:56,600 --> 00:05:01,240 Speaker 1: Group lower their forecast for margin growth they did, um, 94 00:05:01,320 --> 00:05:03,560 Speaker 1: but we have that baked into our numbers. So when 95 00:05:03,560 --> 00:05:05,200 Speaker 1: you're looking at City Group earning is one of the 96 00:05:05,200 --> 00:05:07,400 Speaker 1: important things you want to watch for is the consumption 97 00:05:07,560 --> 00:05:10,600 Speaker 1: of their deferred tax asset. It gets a bit complicated 98 00:05:10,600 --> 00:05:13,200 Speaker 1: in terms of the accounting issues, but basically it helps 99 00:05:13,240 --> 00:05:15,800 Speaker 1: them because there's less taxes that they have to pay 100 00:05:15,800 --> 00:05:19,320 Speaker 1: against that as they earn money, their tangible book values growing. 101 00:05:19,720 --> 00:05:21,919 Speaker 1: It's almost that sixty three allar and fifty cents today, 102 00:05:22,000 --> 00:05:24,040 Speaker 1: So that means you can buy the stock today for 103 00:05:24,960 --> 00:05:27,960 Speaker 1: that tangible book value when you're looking at capital levels 104 00:05:27,960 --> 00:05:30,640 Speaker 1: are already well above minimums where they don't even have 105 00:05:30,680 --> 00:05:32,960 Speaker 1: to meet them until two thousand nineteen. So we like 106 00:05:33,040 --> 00:05:34,960 Speaker 1: the value here quite a bit. You say that it 107 00:05:35,040 --> 00:05:39,040 Speaker 1: is a tremendous value for investors. City Group shares right 108 00:05:39,040 --> 00:05:41,360 Speaker 1: now trading at forty four dollars and thirty five cents 109 00:05:41,400 --> 00:05:45,520 Speaker 1: are down ten cents. Also with City Group, they said 110 00:05:45,520 --> 00:05:48,120 Speaker 1: that they have put a lot of resources to deal 111 00:05:48,200 --> 00:05:52,960 Speaker 1: with the inquiries and complaints from costco host sale customers 112 00:05:53,279 --> 00:05:56,279 Speaker 1: because you know, they took over as the retailer's exclusive 113 00:05:56,279 --> 00:05:58,400 Speaker 1: credit card issue or last month. Are they going to 114 00:05:58,440 --> 00:06:01,920 Speaker 1: be able to resolve these issues? Yeah? I think they will. 115 00:06:02,000 --> 00:06:05,080 Speaker 1: You know, it's basic level blocking tackling of running the 116 00:06:05,120 --> 00:06:07,960 Speaker 1: call center for a card type business. So they'll put 117 00:06:07,960 --> 00:06:11,720 Speaker 1: the money in resources where to get things right. Um, 118 00:06:11,800 --> 00:06:14,400 Speaker 1: so I'm not really seeing an issue there all right. 119 00:06:14,400 --> 00:06:18,600 Speaker 1: Think they described a five percent jump in company wide 120 00:06:18,760 --> 00:06:22,479 Speaker 1: operating expenses cost cuts. Is that going to mean we 121 00:06:22,520 --> 00:06:25,839 Speaker 1: know that JP Morgan has certainly been focused on cutting costs. 122 00:06:25,880 --> 00:06:27,520 Speaker 1: Is that something that all banks are just going to 123 00:06:27,640 --> 00:06:31,640 Speaker 1: do from now on on a regular basis. You know, 124 00:06:31,760 --> 00:06:33,720 Speaker 1: JP Morgan, I think thinks about it the right way. 125 00:06:33,760 --> 00:06:36,360 Speaker 1: When you go to or listen to their analyst day 126 00:06:36,440 --> 00:06:39,560 Speaker 1: or investor day. They talked about continuing to invest through 127 00:06:39,560 --> 00:06:43,279 Speaker 1: the cycle of not just blindly cutting costs, but investments 128 00:06:43,279 --> 00:06:45,680 Speaker 1: that they make, say five six years ago, or paying 129 00:06:45,720 --> 00:06:47,920 Speaker 1: off today, and that never would have translated to revenue 130 00:06:47,920 --> 00:06:50,560 Speaker 1: if they didn't make those investments. So I'm fine if 131 00:06:50,560 --> 00:06:53,760 Speaker 1: they're not going to continually cut costs. Where it would 132 00:06:53,760 --> 00:06:56,479 Speaker 1: actually help UM is if you actually get some interest 133 00:06:56,560 --> 00:06:59,440 Speaker 1: rate rises and they could um slow a lot of 134 00:06:59,440 --> 00:07:02,919 Speaker 1: that interest revenue down to the bottom line. Now, another 135 00:07:02,960 --> 00:07:06,159 Speaker 1: bank that reported results was US Bank Corps. Tell me 136 00:07:06,240 --> 00:07:08,960 Speaker 1: about them. The shares are higher right now by one 137 00:07:08,960 --> 00:07:12,640 Speaker 1: and a half percent. Uh stock has had a great week, 138 00:07:12,880 --> 00:07:15,320 Speaker 1: wondering if you could tell us what makes US Bank 139 00:07:15,320 --> 00:07:18,960 Speaker 1: Corps so good. Yeah, they're really known as one of 140 00:07:18,960 --> 00:07:21,160 Speaker 1: the Christine banks, them and Wells Fargo. Just when you 141 00:07:21,160 --> 00:07:24,480 Speaker 1: look at their return on equity or return on tangible equity, 142 00:07:24,520 --> 00:07:27,120 Speaker 1: and that's just their net income over the equities that 143 00:07:27,160 --> 00:07:30,200 Speaker 1: they're deploying into the business. They're always head and shoulders 144 00:07:30,240 --> 00:07:32,920 Speaker 1: above seemed to be the rest of the banking factor. 145 00:07:33,040 --> 00:07:35,200 Speaker 1: Part of it is a payment processing business that they 146 00:07:35,200 --> 00:07:37,560 Speaker 1: have in there, which is extremely capital light and it 147 00:07:37,560 --> 00:07:40,440 Speaker 1: always tends to help them. And then they have tremendous underwriting. 148 00:07:40,480 --> 00:07:42,640 Speaker 1: So when you look at the excess spread that they're 149 00:07:42,640 --> 00:07:45,600 Speaker 1: earning minus their net charge offs or the loans that 150 00:07:45,600 --> 00:07:48,040 Speaker 1: they have to charge off that go bad, they tend 151 00:07:48,040 --> 00:07:50,880 Speaker 1: to rank up up there pretty high. And then management 152 00:07:51,040 --> 00:07:53,720 Speaker 1: is I mean, management has been been running the bank 153 00:07:53,800 --> 00:07:56,360 Speaker 1: for quite some time. Anytime they do a deal, it's 154 00:07:56,520 --> 00:07:58,960 Speaker 1: usually creative shareholders, so you can kind of think about 155 00:07:59,000 --> 00:08:01,240 Speaker 1: that as a first mean bank. The thing is, though, 156 00:08:01,480 --> 00:08:03,280 Speaker 1: when you look at comp them to the other ones 157 00:08:03,320 --> 00:08:05,600 Speaker 1: in terms of price the tangible book value, they also 158 00:08:05,640 --> 00:08:09,200 Speaker 1: seem to be UM at a premium. At a premium, 159 00:08:09,440 --> 00:08:13,120 Speaker 1: they pay a two point four percent dividend. That's the 160 00:08:13,360 --> 00:08:18,480 Speaker 1: US Bank Corps shares are five cents right now. Ups 161 00:08:18,640 --> 00:08:23,320 Speaker 1: p n C Financial Services a group they're based in Pittsburgh, 162 00:08:23,360 --> 00:08:25,680 Speaker 1: a dividend of over two and a half percent. What's 163 00:08:25,680 --> 00:08:29,480 Speaker 1: your take on PNC Financial? You know, a bit more 164 00:08:29,600 --> 00:08:32,840 Speaker 1: tilted towards the commercial side of the business. Um when 165 00:08:32,840 --> 00:08:35,320 Speaker 1: we were talking before about you know, not all banks 166 00:08:35,320 --> 00:08:37,320 Speaker 1: are just a bank. PNC tends to be you know, 167 00:08:37,440 --> 00:08:40,720 Speaker 1: your typical consumer uh, and commercial bank tilted more to 168 00:08:40,800 --> 00:08:43,439 Speaker 1: the commercial side, you know, good bank trying to think 169 00:08:43,440 --> 00:08:46,560 Speaker 1: of it as a super regional again, usually treads more 170 00:08:46,600 --> 00:08:49,760 Speaker 1: at a premium than say the Ultramega caps would. The 171 00:08:49,800 --> 00:08:52,680 Speaker 1: Bank America is the city groups of the world, um, 172 00:08:52,920 --> 00:08:55,160 Speaker 1: just because they won't don't have to hold as much 173 00:08:55,200 --> 00:08:58,480 Speaker 1: capital as some of the bigger guys. Pack West Bank 174 00:08:58,520 --> 00:09:02,120 Speaker 1: Corps also reported second quarter results that they said that 175 00:09:02,240 --> 00:09:04,960 Speaker 1: they earn sixty eight cents to share. The estimate was 176 00:09:05,000 --> 00:09:07,920 Speaker 1: for sixty nine cents to share. The stock is lower 177 00:09:07,960 --> 00:09:12,160 Speaker 1: net earnings decreasing, they say, do mostly to lower accreation 178 00:09:12,240 --> 00:09:15,480 Speaker 1: on acquired loans and leases, as well as lower gain 179 00:09:15,559 --> 00:09:20,400 Speaker 1: on sales of securities. Tell me about pack West Bank 180 00:09:20,440 --> 00:09:24,520 Speaker 1: Corps and they've got a dividend of nearly five Yeah, 181 00:09:24,559 --> 00:09:27,760 Speaker 1: that's right, they do. So. One of the nice things 182 00:09:27,800 --> 00:09:31,840 Speaker 1: about not being absolutely gigantic bank compared to say some 183 00:09:31,880 --> 00:09:34,120 Speaker 1: of the c card banks is you could pay out 184 00:09:34,160 --> 00:09:37,480 Speaker 1: more of your earnings um in form of dividends, so 185 00:09:37,520 --> 00:09:40,040 Speaker 1: you could, you know, theoretically have a higher dividend yield 186 00:09:40,080 --> 00:09:42,560 Speaker 1: in that. The thing that worried me about some of 187 00:09:42,559 --> 00:09:45,679 Speaker 1: the regional banks compared to the bigger banks is the 188 00:09:45,720 --> 00:09:47,880 Speaker 1: amount of cost that they're going to have to eventually 189 00:09:47,920 --> 00:09:51,480 Speaker 1: scale through in terms of regulatory environment, So the amount 190 00:09:51,520 --> 00:09:53,120 Speaker 1: of people that you have to hire, the amount of 191 00:09:53,160 --> 00:09:55,319 Speaker 1: systems that you have to put in place, consultants, things 192 00:09:55,360 --> 00:09:58,560 Speaker 1: like that. It could be a dragon earning. So we're 193 00:09:58,559 --> 00:10:00,599 Speaker 1: looking at the regional bank index, comparing it to the 194 00:10:00,679 --> 00:10:04,280 Speaker 1: large cat bank index and seeing the premium in multiple 195 00:10:04,280 --> 00:10:06,120 Speaker 1: points that you have to pay above that. It probably 196 00:10:06,160 --> 00:10:08,959 Speaker 1: doesn't make sense in our viue here, And you say 197 00:10:09,040 --> 00:10:13,080 Speaker 1: that city group is really in the compelling value correct, Yeah, 198 00:10:13,120 --> 00:10:15,839 Speaker 1: we think so. I mean in our base case, and 199 00:10:15,880 --> 00:10:17,600 Speaker 1: the way we do everything is look at a range 200 00:10:17,600 --> 00:10:20,839 Speaker 1: of values. So our base case estimate is we think 201 00:10:20,840 --> 00:10:23,920 Speaker 1: city groups worth seventy five per share. Now, in a 202 00:10:23,960 --> 00:10:27,680 Speaker 1: worst case scenario where the net interest margin doesn't rise 203 00:10:27,720 --> 00:10:31,120 Speaker 1: at all for the next five years, so very pessimistic scenario, 204 00:10:31,600 --> 00:10:34,400 Speaker 1: we get the share is worth intrinsically of only about 205 00:10:34,440 --> 00:10:37,600 Speaker 1: forty dollars per share. Now, there's not much downside, there's 206 00:10:37,640 --> 00:10:39,319 Speaker 1: quite a bit of upside. That's what we call in 207 00:10:39,400 --> 00:10:42,800 Speaker 1: the service reward um. So when you're buying a stock 208 00:10:42,880 --> 00:10:46,400 Speaker 1: like that at quote unquote value type prices, it's you know, 209 00:10:46,480 --> 00:10:48,800 Speaker 1: that's investing. That's that's what we think, that's what we're 210 00:10:48,800 --> 00:10:51,040 Speaker 1: trying to do here. Well, thank you very much for 211 00:10:51,120 --> 00:10:55,160 Speaker 1: sharing that information. Mike Mattioli is a portfolio manager at 212 00:10:55,400 --> 00:10:59,960 Speaker 1: Manu Life Asset Management. Talking about the City Group, you said, 213 00:11:00,080 --> 00:11:03,240 Speaker 1: is it is a real value shares a City Group 214 00:11:03,320 --> 00:11:07,520 Speaker 1: for thirty six cents down eight cents a share. This 215 00:11:07,600 --> 00:11:10,120 Speaker 1: is taking Stock. We take you through to the clothes next, 216 00:11:10,160 --> 00:11:11,679 Speaker 1: and this is Bloomberg.